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Can you claim life insurance as a business expense?

If you’re a director of a business, it’s likely that you’ll want to invest in life insurance. Whether it’s to protect your business or your family, you can get life insurance through the business. Some options are not tax-efficient, however, there are some life insurance policies that can be claimed as a business expense.

How does it work?

Like most insurance policies there are different types of plans that you can take out. This normally depends on how much cover you need, how long you want it for and where you want the money to go. Some companies offer life insurance as a benefit in kind, which is often not enough to protect your family. Directors or business owners may also want a life insurance policy to protect the business. For example, against the death of a partner or a key employee in order to keep the business running.

In order to claim life insurance as a business expense, you’ll need one of two policies. A relevant life policy or a key man insurance policy.

When you want the money to go back into the business

When you want to protect your business, you can look into shareholder protection or partnership protection. this is where you’ll either take out an own life policy or a life of another policy on your other partners. If you are a majority shareholder, then these types of policies are not deemed to be tax-efficient. This is because, in order to be a tax-efficient policy and claimed as a business expense, it needs to be ‘solely for the purposes of the business’. With major shareholders, the money goes back into the business they own. This creates a fine line between for business purposes or for the benefit of the individual.

Key man insurance

If you are not a majority shareholder, then you can take out a key man policy. The money can be paid back into the business AND claimed as a business expense.

A key man insurance is tax efficient and cheaper for the individual taking out the policy. This is because if you were to pay for an individual policy, you’re paying it out of your net salary. You’ve already been taxed on this policy.

Say the monthly premium was £100, for simplicity and you’re on a higher rate income tax. Out of each £100 you would be paid, you’ve already paid, say, £3.45 on employee national insurance and tax of around £66.66

Therefore, you’d need a total of £170.11 gross earnings to pay for the premium.

When you run key man insurance through the business instead, you’re not paying income tax and can claim the insurance back as a business expense.

With a monthly premium of £100, if it comes out of the business, you’re not paying income tax on it. The policy is also exempt from paying employer national insurance too. PLUS, you’ll be able to claim it back as a business expense, which means you less 20% on the policy. Essentially, the policy is therefore £80 instead of £100.

Opting for more cover

If you choose to go down this route but were happy to take out a policy at around £100 through a personal policy, which actually equates to £170.11 out of your gross salary, you can get more coverage for the same price by running it through the business.

This sounds long-winded, but essentially, you’ll be paying the same amount for a higher amount of coverage.

When you want the money to go to your family

With key man insurance, it is still possible to get the payout to go to your family. Once the business has made the claim and received the money to keep the business running, the lump sum can also be taken out as income and provided for the family. The payment is then taxed just like normal income. If you’ve opted more cover, in this instance it can help offset any tax paid and give your money a higher financial sum to protect them.

Relevant life policies

If you are a director that has an employer-employee relationship with the business then a relevant life policy is a great alternative. Relevant life plans are only eligible for salaried employees. In fact, all employees within the business are eligible for relevant life plans. This goes for directors too, as long as they are paid a salary and not dividends.

Relevant life insurance is a great way to provide a death in service benefit for employers or directors without paying the benefit in kind tax. The premiums are an allowable business expense, which means the business does not pay national insurance as well as offsetting corporation tax.

Benefits for the individual

As well as being able to be claimed as a business expense, relevant life policies benefit the individual employee or director too. This is because no income tax is due to be paid on the payout. National insurance is not paid either. The business pays for the premiums, but the money goes directly to the family.

As the policy is written into a trust, it also means the family do not need to pay inheritance tax on the payout.

Get tax advice

When it comes to tax-efficient life insurance policies, it’s really important that you don’t incorrectly deduct costs. This can cause tax implications later if you get it wrong, costing you more. It’s always best to speak to a financial advisor, do your sums and check with your local tax office before making assumptions on your life insurance and the tax rules. As a general rule, these policies are normally considered to be tax-efficient, so it’s worth exploring your options.

Save on costs by claiming life insurance as a business expense

By running a life insurance policy through the business, you can save money. With key man insurance, you can save on both corporation tax and national insurance. With relevant life, the family can benefit too by saving on inheritance tax. The individual doesn’t pay national insurance or income tax either.

For more advice on life insurance and whether it can be claimed as a business expense, get in touch with an advisor today. We offer free advice and quotes to find the best solution for your needs.

£203,000 of Business Protection cover for £10 per month/£2.50 per week is based on 30 year old non-smoking male over a 15 year level term with AIG. Quote correct as of 31/03/2016.
Key Man Insurance quote of £8.79 per month is based on 30 year non-smoking male with £200k of cover over 10 years with Legal and General. Quote accurate was of 6th April 2017
Relevant Life Policy quote of £8.94 per month is based on 28 year old non-smoking female with £175k of cover over 15 years with Legal And General. Quote accurate as of 6th April 2017
Business Life Insurance quote of £2.31 per week is based on a key man policy of a 31 year old non-smoking male with £200k of cover over 15 years with Legal And General. Quote accurate as of 6th April 2017
Business Life Protection quote of 32p per day is based on a relevant life policy of a 27 year old non-smoking male with £225k of cover over 10 years with Royal London. Quote accurate as of 6th April 2017
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